How many times have you driven past a property and said to yourself, “If only I had bought that property when it was for sale five or ten years ago?
Who wouldn’t have entered into the property market 20 years ago if they knew that the properties selected would have more than doubled in value?
Most well located properties have done this and more over the last decade?
Fast forward five years from now – How will you feel if you have not created your own well positioned investment property portfolio - that is not only paying for itself BUT also giving you a passive income flow?
At IR HOMES you can use our Investor Ready Homes strategy to create Wealth from Strategic Property Investing.
When selecting a potential property for your investment portfolio there are 2 main things you must consider when devising your strategy to pay for the property you choose.
1. Capital Growth - CAGR (compound annual growth rate) essentially smoothes out the progress of your investment over a period of time, providing a clearer picture of your compounding annual rate of return in Growth of your Capital investment. CAPITAL GROWTH is based upon all the factors concerning the LAND component. It is the land that appreciates in value. This is what gives you increased Net wealth via increasing your EQUITY (or net value after all costs have been paid for). I believe that a good rate of Capital Growth is a Doubling in Value every 10 years or 7.18% CAGR. (NB: a doubling in value every 15 years equates to a 4.73% CAGR).
2. Cashflow - Gross rental yield. To calculate, take the 'Annual rental income (Weekly rent x 52 weeks)' and divide by the 'Property value'. Then multiply this number by 100. Example: Property value $600,000 and expected rent $500 a week looks like this:- [($500x52) / $600,000] x 100 = 4.33% Gross Rental Yield
CASHFLOW is the income derived from the IMPROVEMENTS (Buildings) made on the land - and usually these are depreciating in value every year. Please note well that all improvements require constant maintenance to maintain their value. However, it is the improvements that generate your CASHFLOW (or the ability to create an income that can be used to pay for your investment). The land can be improved for residential purposes by building houses, units, apartments etc. Or the land can be improved by building structures that are suitable for commercial, industrial, educational, governmental, and/or agricultural purposes to name some potential income streams.
This is why the development of your Personal Investment Strategy is VERY IMPORTANT - BEFORE you buy an investment property!
Owner Occupy (Family Home) vs Investment Property
When you buy your FAMILY HOME it’s all about YOU - Your tastes, Your needs, Your wants - Your Budget!
It is important to know whether this is your FIRST home or your FOREVER home, as the decision making process is slightly different when considering a suitable property to purchase and your affordable budget level.
However, when you buy an investment property, it couldn’t be more different - as now you’re trying to cater for someone else’s needs and wants. In fact - Buying an Investment property is all about the NUMBERS (or maths) - that is maximising your ROI - Return on Investment.
Choosing a property that has the best chance of being in high rental demand requires setting aside your personal tastes and instead listening to the market wants, and your ability to pay for it. The property strategy also depends upon whether you are needing a Positive cashflow, or you can afford to subsidise your purchase becuase you believe it has awesome short-term capital growth prospects.
Do Not Over capitalise, Do Not Get Emotional in your decision making, Find the best property for your available budget that has the best chance to deliver on the goals stated in your personal investment strategy.
WHICH INVESTMENT PROPERTY TO BUY: NEW VERSUS OLD?
If you mention to friends, family and colleagues that you are looking to buy an investment property, chances are everyone will jump at the opportunity to tell you what sort of property you should buy and everyone always has an opinion on what is better – buying established or buying new. There are many arguments for and against but here are some of the most common reasons which pop up time and time again:
However I will reiterate once again - it all depends upon your Personal Investment Property Strategy as to which property is best for you!
WHY BUY OLD ?
- Opportunity to negotiate on the purchase price;
- Opportunity to ‘value add’ to the property by renovating or refurbishing;
- Opportunity to ‘pick up a bargain’
- Stronger performers in slower markets;
- Established historical sales data;
- You pay a premium for new properties
WHY BUY NEW ?
• Quality construction;
• Modern design with better energy efficiency and sustainability features;
• Attract quality tenants willing to pay a premium;
• Lower vacancy rates;
• Lower maintenance costs;
• Higher claimable depreciation value;
• Generally a better resale value;
• Structural guarantees and warranties apply.
You can argue the pros and cons of old versus new until the cows come home but one of the most compelling arguments lies in the depreciation value of the home. The Australian Tax Office has determined investors can claim depreciation on any home for a 40 year period from the date construction is complete at 2.5% per annum.
So, if a home is brand new you can claim full depreciation benefits where as if a house is 15 years old, you can only claim depreciation on the remaining 25 years.
Take for example if we were to compare two very similar houses on the same street which are built on the same sized block of land and are almost identical except one is brand new and the other is five years old. The brand new house is on the market for $400,000 whilst the slightly older property is on the market for $375,000. Many investors would assume the older property is the smarter choice because you are immediately $25,000 in front. But is this really the case?
IF You Kept Both Homes for 40 Years!, then the new home which is on the market for $400,000 you can claim depreciation on the total amount of the building (including the fixtures and fittings) so you are paying the true value of what the land in really worth.
However, in the case of the older home, you can only claim depreciation on the remaining 35 years (rather than the full 40 years if it was a brand new building) which may result in you paying more than what the land is really worth. As the property is five years old you have also missed out on the opportunity to depreciate the fixtures and fittings included in the property at purchase such as window treatments and carpets.
So a NEW HOUSE bought for $400,000 = LAND VALUE $200,000 + BUILDING VALUE $200,000 DEPRECIABLE AMOUNT $200,000 ($200,000 x 2.5%) x 40 years REAL PURCHASE PRICE $200,000 (asking price minus depreciable amount)
A 5 YO Established House bought for $375,000 = LAND VALUE $200,000 + BUILDING VALUE $175,000 DEPRECIABLE AMOUNT $153,125 ($175,000 x 2.5%) x 35 years REAL PURCHASE PRICE $221,875 (asking price minus depreciable amount)
Property experts argue land appreciates in value whilst buildings depreciate so if this is the case, when we compare the two properties you are effectively paying more than $21,000 extra for the land with the older property. It makes for an interesting argument, doesn’t it? However if you can't afford a $400,000 property but you can afford a $375,000 then this argument is a moot point!
As depreciation specifically impacts your property investment, it is important to have a solid understanding of what it is and how it works before you purchase a property. For a detailed explanation and all the information you need to know, make sure you speak to an Investor Ready Homes Investment Specialist First.
DISCLAIMER:This information is of a general nature only and does not constitute professional advice. We strongly recommend that you seek your own professional advice in relation to your particular circumstances.
How to add value with a granny flat
Adding a self contained unit, or ‘granny flat’ to your home can be a cost effective way to provide a home for elderly relatives or older children struggling with rising rent. It can also be a great way for homeowners and investors to generate extra cash flow through rental income and increase the property’s overall value.
With rental yields of anywhere between $200-$600 a week, granny flats can be a great strategy if you’re looking for a long-term return on investment. Not only do they provide a second income, you can also benefit from positive gearing and extra claimables on your depreciation schedule.
From a valuation perspective, the costs of construction can be significantly higher than the increased value of the property once the granny flat is complete. Depending on whether you’re building a freestanding structure or a unit on top of an existing garage (the latter tends to be more expensive as it can require more engineering work), average costs can range from between $100,000 - $150,000 and can be expected to add 20 to 30 per cent to the total value.
While valuers do consider the rental return of a property as part of their assessment, they can’t value a property on this basis alone. However, in an area where rental demand is high, a granny flat can stand out from the competition when it comes to selling.
If you’re looking to achieve the highest increase in capital value on your property, it’s important to invest in a high quality structure, fixtures and finishings that will stand the test of time. The most lucrative granny flats are usually in areas where there is a limited supply of similar properties, meaning yours will appear unique. A granny flat will appeal to both owner-occupiers and investors looking for an additional income, but bear in mind a structure that isn’t in keeping with the design of the existing property or encroaches too much on the garden may actually end up devaluing the property.
By law, granny flats must comply with both the Building Code of Australia and any relevant Australian Standards. It’s also important to be aware of all rules and regulations relating to granny flats as these vary from state to state and even council to council, so do your homework first.
IR Homes - Investor Ready Homes - Can supply Quality Granny Flats for you - Ask us how today!